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Home Banking CBN concerned about rising non-performing loans

CBN concerned about rising non-performing loans

The Central Bank of Nigeria, CBN, has warned of a grave financial crisis in the Nigerian banking sector in the remaining part of 2015, while it also raised an alarm of a likely increase in Non-Performing Loans, NPL, in the financial sector due to the exposure of banks to the oil and gas sector.

The Bank also expressed concern over the decline in the quality of bank assets in the period under review, as NPLs increased by approximately 70 per cent to N628.54 billion at end-June 2015, from N363.31 billion at end-December 2014.

“At 4.65 per cent from 2.88 per cent, the NPL ratio remained within the prudential limit of 5.0 per cent though trended closer to the regulatory threshold, reflecting greater levels of stress in the banking industry,” the CBN maintained.

The CBN, in its recently released, Financial Stability Report for June 2015, further said the decline in crude oil revenue and dwindling demand for Nigeria’s crude will pose significant challenges to the country, especially in the areas of infrastructure financing and job creation.

The apex bank noted that the falling oil prices have impacted negatively on the balance sheets of many banks, revenue drive of oil and gas companies and their ability to meet their financial obligations to banks and their financiers among others.

The CBN said: “Falling crude oil prices impacted adversely on government revenues and overall fiscal operations. The development resulted in dwindling revenue to state governments and oil and gas operators.

“In view of the significant exposure of banks to these sectors, NPLs are likely to increase, leading to higher credit risk.

“Further dimensions of credit risk that may arise in the second half of 2015 include NPLs resulting from foreign currency exposures; thus, straining banks’ capacity to meet their foreign currency obligations.”

Contingency planning and stress tests

The CBN, however, said it will continue to monitor the developments while requiring banks to strengthen their contingency plans and to conduct regular stress tests to mitigate the impact of the crash in oil prices on their balance sheets.

The CBN further said that output growth in the second half of 2015 is expected to be subdued owing to a combination of factors, including dwindling oil revenue inflow and security challenges.

It said: “Also, inflationary pressures is projected to raise headline inflation in the second half of the year to 9.3, 9.3, 9.8, 10.0 and 10.0 per cent in July, August, September, October and November 2015, respectively.

“The persistent dwindling oil receipts and falling demand for Nigerian crude will pose significant challenges to the country in various areas, particularly the financing of the desired infrastructural development programmes and job creation.

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